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Banking and Capital Markets
Balance sheet management benchmark surveyStatus of balance sheet management practices among international banks – 2009
3
Pricewaterhousecoopers Balance sheet managementbenchmark survey
ContentsIntroduction 4
Background 5
Key findings 7
General information 8
Overall governance 9
ALM unit roles and responsibilities 11
Liquidity risk 13
Interest rate risk 19
Capital management 23
Funds transfer pricing 26
Discretionary investment portfolios 28
Systems 29
Contacts 30
4
Pricewaterhousecoopers Balance sheet managementbenchmark survey
This study covers the four main areas of balance sheet management, namely interest rate risk management, liquidity risk management, capital management and management of discretionary investment portfolios. Many of these functions would be covered by the asset and liability management (ALM) function in banks, but we use the broader term ‘balance sheet management’ because the study covers capital management as well as the more traditional ALM focus areas.
The financial crisis has highlighted the need for organisations to take a more holistic view of their balance sheets. The financial view of the organisation has evolved over the past decade or so to one which looks at lines of business, rather than legal entities, as the primary profit centres, and both finance departments and national supervisors have been struggling with the tensions arising from this shift. At the same time the risk view of the organisation has also been equally silo-driven, with risk departments focusing on individual risk classes. Liquidity risk, in particular, has thrown up some challenges to this way of viewing finance and risk. What may look acceptable for each line of business on its own may turn out to be an unacceptable level of risk or product concentration for the organisation as a whole. Likewise certain financial products are not clearly assignable to any one risk class – Collateralized Debt Obligations (CDO) in particular have been shown to present a lethal combination of market, credit and liquidity risks. At the same time, national supervisors, understandably keen to contain the risks to their own financial systems, have sought to impose restrictions around cross-border financing and capital flows within international banking groups.
These themes present a number of challenges to the way in which banking groups manage their balance sheets, especially in the area of governance and oversight, which is a major area of focus of this survey.
The objective of this survey is to provide the international banking industry with an overview of the state of balance sheet management in banks, to identify areas for improvement and help banks prepare for the future.
PricewaterhouseCoopers1 would like to extend our thanks to the many banks who participated in this survey.
Introduction
1 ‘PricewaterhouseCoopers’ refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
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Pricewaterhousecoopers Balance sheet managementbenchmark survey
Background
The financial institutions who participated in this survey were as follows:
The participants in the survey will receive an individual benchmarking report comparing them with their peers internationally. This report summarises the aggregate responses but does not attribute data to specific individual respondents.
Scope of benchmarking survey The survey was designed to cover both the qualitative and quantitative aspects of balance sheet management approaches currently being utilised by industry participants, with a strong focus on governance and organisation. The results of the survey are intended to assist participating institutions by providing peer benchmarks of industry practices. This report has been organised around the following balance sheet management subject matter topics that were posed to each of the survey respondents:
Americas
Bank of America•
Citigroup•
Wells Fargo•
Europe
ABN Amro•
Banesto•
Bankinter•
Bank of Ireland•
Barclays•
BBVA•
BNP Paribas•
Britannia•
Caixa Catalunya•
Caja Madrid•
Credit Suisse•
Danske Bank•
HSBC•
ING•
Intesa Sanpaolo•
Landesbank Berlin•
Landesbank •Hessen-Thüringen
Lloyds Banking Group•
Nationwide Building •Society
Nordea•
Nykredit•
Rabobank•
Royal Bank of Scotland•
Santander•
SNS REAAL•
Standard Chartered Bank•
Svenska Handelsbanken•
UBI Banca•
UBS•
UniCredit•
Middle East and Africa
Absa•
FirstRand•
Nedbank•
Standard Bank•
Asia
CIMB•
DBS Group Holdings•
Kasikornbank•
Oversea-Chinese •Banking Corporation
Siam Commercial Bank•
Australia
Commonwealth Bank •of Australia
Overall governance•
ALM unit roles and •responsibilities
Liquidity risk•
Interest rate risk•
Capital management•
Funds transfer pricing•
Discretionary investment •portfolios
Systems•
PricewaterhouseCoopers is pleased to present the results of our survey of the balance sheet management practices at 43 leading financial institutions across the world. The breadth of the survey participants gives a good picture of developments internationally.
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Pricewaterhousecoopers Balance sheet managementbenchmark survey
Survey methodologyEach section of this report includes an analysis of the survey results and a discussion of the underlying issues. Tables and charts are presented to help the reader quickly ascertain the main issues associated with each topic and to assist in the benchmarking of his/her respective institution’s practices.
In order to display results provided by participating institutions, PricewaterhouseCoopers designed a survey methodology that strived to achieve the appropriate balance between:
Promoting maximum participation among institutions by •using data templates that required firms to report their actual practices;
Ensuring soundness, integrity and comparability of the •survey to display results based on the actual data reported by participants;
Protecting confidentiality of participating institutions’ •responses while providing maximum insight into the detailed parameters needed for analysing balance sheet management.
The survey was carried out from April to June 2009, and the methodology used was a questionnaire supplemented where appropriate with interviews with representatives of participating institutions.
Please note that totals do not always add up to 100 because of rounding, or because respondents could choose more than one answer.
Survey confidentialityThe individual survey results and the survey questionnaire itself are confidential to the responding institutions and PricewaterhouseCoopers. Each institution’s individual results have been kept strictly confidential and peer responses have been presented in a way that will not allow identification of any specific institution based on its submitted data. The results are based solely on survey responses as provided by each participant to PricewaterhouseCoopers. PricewaterhouseCoopers has not subjected the data contained herein to audit or review procedures or any other testing to validate the accuracy or reasonableness of the data provided by the participating companies.
A word of thanksWe acknowledge that the highly detailed nature of the survey questionnaire required a considerable amount of effort on the part of each participating institution to provide commensurately detailed and meaningful responses. We would like to extend our thanks to the responding institutions for participating in this study, and providing the breath and depth of qualitative and quantitative response within balance sheet management topics.
We trust that you will find the survey results insightful and hope that they serve as a catalyst for discussion and action within your respective financial institutions.
If you have any comment or question regarding this survey, or would like to request additional copies, please contact your regional PricewaterhouseCoopers contacts listed in the appendix to this report.
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Pricewaterhousecoopers Balance sheet managementbenchmark survey
Key findings
Overall governance: There is still a trend for banks to measure, manage and monitor the different risks separately, but an encouraging trend is the establishment of either capital management committees, or a broader mandate for the existing Asset-Liability Committee (ALCO) to focus on capital. The vast majority of banks operate a centralised ALM model, which enables oversight of the entire group balance sheet, usually supplemented with lower-level ALM units focusing either on business units or legal entities.
ALM unit roles and responsibilities: The responsibility for the ALM unit is almost evenly divided between the Treasury and Chief Financial Officer (CFO) functions (see Figure 3.1). Only 51% of ALM units look at capital management (see Figure 3.2), but in certain cases capital management lies with other departments, such as the Chief Risk Officer (CRO). Most banks have benchmarked their ALM framework to the Basel Committee on Banking Supervision (BCBS) guidance, ‘Principles for the Management and Supervision of Interest Rate Risk’, and half of the respondents have conducted an independent third party review of the ALM framework within the last 12 months.
Liquidity risk: Not surprisingly, many banks have undertaken an extensive review of liquidity risk management, and a very encouraging 88% now have a formal risk appetite for liquidity risk. An ongoing problem area is collateral management, as banks’ systems do not easily allow for identification of liquid assets that are encumbered (and thus not available to support liquidity needs). All respondents now conduct regular liquidity stress tests (vs. 75% in our 2006 ALM survey), and respondents report that their Boards are well informed with respect to this risk class.
Interest rate risk: Governance remains an area of potential weakness for interest rate risk management, with the ALM unit responsible for both management and measurement in around half of respondents (emerging best practice is for measurement to be done by an independent unit, such as Finance). However, we do see that a significant minority of banks now have the Risk function in a monitoring role, but there is clearly still a long way to go before this is general practice.
There has been further progress towards development of economic value measurement (as recommended by the BCBS), and 80% of respondents now assign capital to Interest Rate Risk in the Banking Book (IRRBB) under Basel II Pillar 2 (in Australia it is part of Pillar 1). However, these capital
measures are still quite crude, with many banks using either the standard 200 bp shock or Net Interest Income (NII) simulation.
Capital management: This includes capital planning, stress testing, capital allocation and economic capital calculation, and tends to sit broadly in the CFO function, although economic capital and stress testing at a number of banks resides within the CRO’s area. With capital planning sitting in Finance, having capital stress tests conducted in Risk can give rise to issues around the consistency and coordination of linkages. The common horizon for capital planning is usually three years or longer; however, capital stress testing typically contemplates a shorter time horizon. Only a small minority of respondents conduct a single stress test scenario, with the vast majority using three or more scenarios.
Funds transfer pricing (FTP): Despite the havoc which the financial crisis played with liquidity and other financing assumptions, banks seem generally quite satisfied with their FTP framework and we have not noted any significant shifts in trends since our 2006 survey.
Discretionary investment portfolios: Other than standard liquidity portfolios, there does not seem to be any industry consensus on the best way to manage discretionary investments, and one is left with the distinct impression that these investment decisions are made on a very ad hoc basis, without much in the way of formal policies and processes around them.
Systems: Banks still tend to operate with a patchwork of legacy systems set up to manage different aspects of the balance sheet (liquidity risk, interest rate risk, etc.), but significant changes are planned. With different systems, any kind of integrated balance sheet management simulation and stress testing is virtually impossible. We anticipate that, over the coming years, banks will upgrade to a more integrated approach, allowing planning and stress scenarios to be carried out across all aspects of the balance sheet. We expect that these integrated systems will cover:
IRRBB and funds transfer pricing;•
Liquidity risk;•
Capital planning and stress testing; and•
Credit portfolio management.•
The scope of balance sheet management has expanded to embrace capital management as well as a more ‘holistic’ view of the balance sheet, although this remains a work in progress.
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Pricewaterhousecoopers Balance sheet managementbenchmark survey
Figure 1.1: Breakdown of participants by asset size
18%
5%0%
% of participants
18%
37%
22%
0 – 10 $bn10 – 50 $bn50 – 100 $bn100 – 200 $bn200 – 500 $bn> 500 $bn
Source: PricewaterhouseCoopers
The survey was conducted at the group head office level for all participants, who represent a good geographical cross-section of domiciles (see Figure 1.2).
Figure 1.2: Breakdown of participants by region
70%
12%
2%
7%
9%
AsiaAustralia/ New ZealandEuropeSouth AfricaAmerica
% of participants
Source: PricewaterhouseCoopers
The participants primarily operate in the global market (see Figure 1.3), and are generally active in retail and commercial banking segments (see Figure 1.4).
Figure 1.3: Participants’ market presence.
43%
26%
31% Local marketRegional marketGlobal market
% of participants
Source: PricewaterhouseCoopers
Figure 1.4: Activities engaged in by participants
0%Consumer banking
Branch-based retail banking
Wholesale banking
Investment banking
Private banking
Wealth management
Insurance
Other
88
95
84
77
86
74
58
28
% of participants
Source: PricewaterhouseCoopers
General informationA total of 43 banks from around the world responded to the survey; participants provided a reasonable mix of large and medium/small banks (see Figure 1.1).
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Pricewaterhousecoopers Balance sheet managementbenchmark survey
Overall governance
It is interesting to note that some banks have started to integrate overall balance sheet and risk oversight into an overarching executive risk committee. This is a trend that is expected to continue within institutions that are taking the steps to promote a holistic view of, and governance over the full spectrum of risks and capital.
Figure 2.1: Body with primary oversight over balance sheet management
0%ALCO
Balance Sheet ManagementCommittee
Executive ManagementCommittee
Group/Executive Risk Committee
Board
Board Risk Committee
Board Audit Committee
Other
88
7
7
16
19
12
0
16
Source: PricewaterhouseCoopers
The ALCO maintains a key focus on the traditional areas of interest rate risk and liquidity risk. In many cases the ALCO has broadened its scope across capital management and also includes the oversight of traded market risk.
Figure 2.2: Areas covered by body with primary oversight
0%Interest rate risk
Liquidity risk
Structural FX risk
Capital management
Funds transfer pricing
Discretionary investment portfolios
Other
100
100
79
74
77
44
23
Source: PricewaterhouseCoopers
Centralised balance sheet managementBalance sheet management is largely centralised, with 91% of respondents managing these activities on a consolidated or group basis (see Figure 2.3). However, many banks that do run
a centralised balance sheet model also supplement the central unit with decentralised (subordinate) units, which are primarily organised along legal entity, business unit or regional basis. Most respondents noted that the subordinate units all operate under a consistently applied group framework and generally report into the central balance sheet management function.
Figure 2.3: Organisation
0%
91 9
CentralisedDecentralised
Is this ALM responsible body centralised or decentralised?
Source: PricewaterhouseCoopers
Figure 2.4: Reporting lines and supplemental balance sheet management units
0%By region
By legal entity
By business unit
43 57
31 56 13
40 53 7
100To regional headTo Group body with ALM responsibilityOther
Source: PricewaterhouseCoopers
The amount of time devoted by the primary body with group oversight over balance sheet management matters is mainly around a one- to two-hour meeting on a monthly basis (see Figure 2.5).
Figure 2.5: Frequency/length of primary oversight body meetings
0%Daily
Weekly
Bi-weekly
Monthly
Bi-monthly
Quarterly
5
5
49 26
5
< 1 hour1 – 2 hours> 2 hours
2
2
2
2
2
Source: PricewaterhouseCoopers
We found that the ALCO remains the key executive governance body with the responsibility for overseeing balance sheet management activities (see Figure 2.1).
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Pricewaterhousecoopers Balance sheet managementbenchmark survey
The composition of the primary oversight body (see Figure 2.6) includes the most senior bank representatives, with the chair generally held by the most senior person, being either the Board Chairman or CEO. Major business unit heads are key participants and voting members. Other voting members include heads of market and credit risks, the chief economist and head of compliance.
Figure 2.6: Composition of primary oversight body
0%Board chairman
Non-executive director
CEO
CFO
CRO
Treasurer
BU heads
ALM unit head
Financial controller
Other
58 21 21
16 20 64
44 56
38 62
21 68 11
10 75 15
85 15
6 47 47
6 56 38
63 38
ChairVoting memberNon-voting member
Source: PricewaterhouseCoopers
For the decentralised subordinate oversight bodies the meeting frequency is at least monthly (see Figure 2.7). The sub-committees that meet on a monthly basis tend to be subsidiary, business unit or regional ALCOs, while those meeting more frequently will more actively focus on market movements and comprise participants that are more closely aligned with the specific activities related to execution of ALCO mandates or strategies.
Figure 2.7: Frequency/length of subordinate oversight body meetings
0%Daily
Weekly
Bi-weekly
Monthly
Bi-monthly
Quarterly
38
5 3
10 29 10
0
0
< 1 hour1 - 2 hours> 2 hours
2.5 2.5
Source: PricewaterhouseCoopers
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Pricewaterhousecoopers Balance sheet managementbenchmark survey
However, there is also a growing percentage that have aligned the reporting to the risk management function, under the CRO or the head of market risk.
Figure 3.1: ALM unit reporting lines
0%CEO
CFO
CRO
Treasurer
Other
2
40
7
35
16
Source: PricewaterhouseCoopers
The typical areas of focus of this unit remain the core ALM activities of interest rate and liquidity risk management, including funds transfer pricing (see Figure 3.2). Several respondents noted that there is more focus on the overall balance sheet structure and optimisation of the funding and capital mix, along with oversight of impact of IAS39 and hedge effectiveness.
Figure 3.2: Areas of focus for ALM unit
0%Interest rate risk
Liquidity risk
Structural FX risk
Capital management
Funds transfer pricing
Discretionary investment portfolios
Other
100
93
70
51
77
40
26
Source: PricewaterhouseCoopers
The size of the ALM department is generally related to the size of the institution, although the size of the unit can vary greatly. Regarding the size of the ALM department, economies of scale appear to realised for banks with assets between 50-100 $billion and 100-200 $billion as indicated by the downward slope and the ‘staff per 10 $billion of assets’ trend line (see Figure 3.3).
Figure 3.3: Size of ALM unit (including subordinate units below group level)
160
140
120
100
80
60
40
20
0
3.0
2.5
2.0
1.5
1.0
0.5
0
Breakdown of staff by asset size
Assets (USD billions)
$10 – 50b $50 – 100b $100 – 200b $200 – 500b > $500b
AverageMinimumMaximum
Staff per 10b of Assets (RHS)
Source: PricewaterhouseCoopers
The primary objective of the ALM unit is to operate as a support unit (see Figure 3.4). However, within this category some responses would indicate that there is some overlap of cost and profit performance objectives. This is the case where the unit may undertake hedging activities or positioning strategies, but has no clear performance metric related to profit or value add. This is one area that banks need to pay attention to, with respect to segregation of duties, separating risk measurement and monitoring from the management and decision making related to transaction execution.
Figure 3.4: Primary objective of ALM unit
0%Profit centre
Cost centre
Support unit
Other
12
5
57
26
Source: PricewaterhouseCoopers
ALM unit roles and responsibilitiesAll of the participating banks have a dedicated ALM support unit, which typically reports to either the CFO or the Treasurer (see Figure 3.1).
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Pricewaterhousecoopers Balance sheet managementbenchmark survey
Just over 83% of participants have benchmarked their ALM unit to a specific external reference point (see Figure 3.5).
Figure 3.5: Benchmarking of ALM framework
16.28%
83.72%
YesNo
Source: PricewaterhouseCoopers
Of the organisations which have conducted external reviews, the primary reference point has been the Basel ‘Principles for the Management and Supervision of Interest Rate Risk’ (see Figure 3.6). In addition to the guidelines and standards in the public domain, many of these respondents noted that they have also used the last PwC ALM Survey published in 2006 as a reference point. Over 50% of respondents who have conducted external benchmarking have done so within the last 12 months (see Figure 3.7).
Figure 3.6: Reference point for ALM framework benchmarking
0%Basel Committee
IIF
CEBS
Local regulator
Other
71
43
40
69
33
Source: PricewaterhouseCoopers
Figure 3.7: Period since last independent review of ALM framework
0%Within last 12 months
Within last 1 – 2 years
Within last 2 – 3 years
Within last 3 – 5 years
Not at all in last 5 years
51
30
0
5
14
Source: PricewaterhouseCoopers
13
Pricewaterhousecoopers Balance sheet managementbenchmark survey
Certainly the painful experiences and lessons throughout the financial crisis have highlighted the dimensions and severity of consequences from liquidity problems. The Bank for International Settlements (BIS) and Institute of International Finance (IIF) have upgraded their guidelines for the management of liquidity risk to incorporate and reiterate what constitutes sound practice.
Many banks have undertaken extensive reviews and upgrades of their liquidity risk frameworks. Now just over 88% of participants have set a formal risk appetite for liquidity risk at Board level compared with 72% in 2006.
Management, measurement and monitoring liquidity riskIn risk management, we distinguish between those responsible for managing the risk (making day-to-day decisions and executing these (see Figure 4.1)), those responsible for measuring the risk (producing metrics and reports (see Figure 4.2)), and those monitoring the risks (ensuring adherence with policies and limits, and reviewing the overall risk profile (see Figure 4.3)). In the world of traded market risk, these would be the front office, middle office and risk management functions, respectively.
However, for liquidity risk it seems that such segregation of duties is not widely applied. The measurement and management of liquidity risk still generally resides within the same unit, as does, in some cases, the monitoring of liquidity risk.
This is an area where we would expect to see growing involvement from the risk management function, particularly with respect to the measurement of liquidity risk being separated from the management of liquidity risk.
Figure 4.1: Responsibility for managing liquidity risk
0%Within trading desk/front office –reporting to head of BU
Dedicated treasury unit –reporting to CEO
Dedicated treasury unit –reporting to CFO
ALM unit – reportingas under 3.1 above
Other
23
12
28
28
9
Source: PricewaterhouseCoopers
Figure 4.2: Responsibility for measuring liquidity risk
0%Within trading desk/front office –reporting to head of BU
Dedicated treasury unit –reporting to CEO
Dedicated treasury unit –reporting to CFO
ALM unit – reportingas under 3.1 above
Within CFO area
Within CRO area
Other
2
2
14
42
9
16
14
Source: PricewaterhouseCoopers
Figure 4.3: Responsibility for monitoring liquidity risk
0%Within trading desk/frontoffice – reporting to head of BU
Dedicated treasuryunit – reporting to CEO
Dedicated treasuryunit – reporting to CFO
ALM unit – reportingas under 3.1 above
Within CFO area
Within CRO area
Other
0
2
14
33
12
30
9
Source: PricewaterhouseCoopers
Liquidity riskLiquidity risk has moved up the agenda to be one of the most important areas of focus within the ALM framework.
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Pricewaterhousecoopers Balance sheet managementbenchmark survey
Governance and oversightThe committee or body with primary oversight for liquidity risk is typically the ALCO (see Figure 4.4).
Figure 4.4: Body with primary oversight over liquidity risk
0%ALCO
Balance SheetManagement Committee
Executive Management Committee
Group Risk Committee
Board
Board Risk Committee
Board Audit Committee
Other
70
5
7
7
0
5
0
9
Source: PricewaterhouseCoopers
Most banks feel that their liquidity risk policies are complete, up to date and fully implemented (58%), or there are only minor gaps in policy or implementation (37%) (see Figure 4.5).
Figure 4.5: Status of liquidity risk management policy
0%Policy is complete, up to date and fully implemented
Policy is broadly complete and up to date, but there are minor gaps in either the policy itself or its implementation
Policy is work in progress
We do not have a group liquidity risk policy
58
37
54
0
Source: PricewaterhouseCoopers
Board awareness of liquidity risk has undoubtedly been heightened over the past three years, either by experience or observation. 90% of respondents feel that their Boards have good understanding of the concepts and technical details or better (see Figure 4.6).
Figure 4.6: Board awareness of liquidity risk
0%Very high understanding with full grasp of the technical details
Broad understanding of the concepts with some understanding of the technical details
Broad understanding of the concepts but little or no understanding of the technical details
Limited understanding of the concepts
16
74
2
5
Source: PricewaterhouseCoopers
Over 65% of respondents indicated that there is regular reporting of liquidity risk to the full Board and/or Board Risk Committee. Around 30% do so on an ad hoc basis (see Figure 4.7).
Figure 4.7: Liquidity risk reporting to the Board
0%At every full Board meeting
At every Board RiskCommittee meeting
On request/ad hoc to the full Board
On request/ad hoc to theBoard Risk Committee
68
65
35
30
Source: PricewaterhouseCoopers
Liquidity risk measurementThe primary measure of liquidity risk is the static maturity gap using a combination of contractual and expected term data (see Figure 4.8). However, it seems that the use of cash flow forecasts using stressed or expected cash flows is gaining greater prominence as the primary measure of liquidity risk.
Figure 4.8: Liquidity risk measures
0%Maturity gap based oncontractual maturity
Maturity gap based on a mixture ofcontractual and expected maturity
Maturity gap based onexpected maturity
Loan/deposit ratio
Liquid assets ratio
Cash flow forecast basedon expected cash flows
Cash flow forecast basedon stress scenarios
Other
Sources of quick liquidityas % of funds at risk
26
65
26
33
49
51
53
30
28
Source: PricewaterhouseCoopers
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Pricewaterhousecoopers Balance sheet managementbenchmark survey
These measures are typically produced on a daily basis and it is often the case that this is a regulatory requirement.
Figure 4.9: Frequency of liquidity risk measurement
0%
40 20 36 4
32 22 46
25 43 29 4
26 6 65 3
69 6 22 3
59 16 22 3
29 21 47 3
29 18 47 6
Maturity gap based oncontractual maturity
Maturity gap based on a mixture ofcontractual and expected maturity
Maturity gap based onexpected maturity
Loan/deposit ratio
Liquid assets ratio
Cash flow forecast basedon expected cash flows
Cash flow forecast basedon stress scenarios
Other (please specify)
DailyWeeklyMonthlyOther
Source: PricewaterhouseCoopers
In measuring funding risk limits and concentration, the factors typically taken into account are the types of products and the spread of maturities. Other factors such as currencies and geographies are commonly used as well (see Figure 4.10).
Figure 4.10: Factors included in liquidity risk measurement
0%Contractual maturities
Effective maturities
Types of products
Types of customers
Currencies
Geographies/countries/regions
Other
70
51
77
67
67
53
9
Source: PricewaterhouseCoopers
Collateral managementCollateral management is seen as material for 86% of respondents (see Figure 4.11).
Figure 4.11: Relevance of collateral management
86%
14%
MaterialImmaterial
Source: PricewaterhouseCoopers
It is essential to have clear, accurate and timely information regarding collateral in order to be able to deal effectively with liquidity events that may require the use of such assets. It is an area where banks need to improve and apply greater rigour in knowing precisely which assets can be quickly liquidated and at what price.
Figure 4.12: Collateral management monitoring
0%We monitor the legal entity where collateral is held in a timely manner
We monitor the physical location wherecollateral is held in a timely manner
60 29
52 33 2
AgreePartially agreeDisagree
Source: PricewaterhouseCoopers
Figure 4.13: Collateral management infrastructure
0%MI systems that differentiate encumbered/unencumbered assets
MI systems that identify assets that can be posted at the central bank
40 45 2
45 45 2
No work neededSome improvement requiredRequires major upgrade
Source: PricewaterhouseCoopers
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Pricewaterhousecoopers Balance sheet managementbenchmark survey
Liquidity stress testsAll responding banks perform some form of liquidity stress testing. This is an improvement from our 2006 survey which revealed that liquidity stress testing was only conducted by 75% of the banks surveyed. The most common type of scenario is a pre-defined scenario based on expert judgement (see Figure 4.14).
Figure 4.14: Liquidity stress test scenarios
0%Pre-defined scenariobased on historical experience
Pre-defined scenariobased on expert judgement
Dynamic scenariobased on expert judgement
Reverse stress test(or ‘stress to fail’)
Multiple scenarios
44
77
35
21
70
Source: PricewaterhouseCoopers
The one-month time horizon for such stress tests is the most common; however, there is growing use of longer time frames out to one year (see Figure 4.15).
Figure 4.15: Liquidity stress test time horizons
0%One day
Two days
Up to one week
Up to one month
Up to three months
Up to six months
Up to twelve months
Other
21
14
40
53
42
19
40
9
Source: PricewaterhouseCoopers
For those banks using multiple scenarios (see Figure 4.16), the number and frequency of scenarios are mostly performed on a monthly basis using two to five or more scenarios.
Figure 4.16: Number and frequency of multiple scenarios
0%1
2
DailyWeeklyMonthlyOther (please specify)
2
0
0
0
5
10
19
0
3 0
7
10
2
4 – 5 2
2
10
0
>5 2
5
14
2
Source: PricewaterhouseCoopers
Within the scenarios 63% of banks assume that central bank funding will be available as part of their stress tests. More than 90% of banks distinguish between firm-specific (single name crisis scenarios) and market-wide stresses in their scenarios.
Supervisory authorities have reviewed around three quarters of the responding banks’ liquidity stress testing scenarios with 51% being ‘fully satisfactory’ (see Figure 4.17). This is an area that is expected to continue to be of high priority with supervisors.
Figure 4.17: Supervisory review of liquidity stress scenarios
0%Yes, and authority was fully satisfied
Yes, but authority requires further minor enhancements
Yes, but authority was dissatisfied
No, but authority has notified us that theyintend to review this in the next 12 months
Authority has not notified us that they plan to review liquidity risk in the next 12 months
Other
51
23
0
7
2
14
Source: PricewaterhouseCoopers
17
Pricewaterhousecoopers Balance sheet managementbenchmark survey
In performing stress tests, multiple factors are taken into account to modify contractual cash flows (see Figure 4.18). Most emphasis is placed upon making assumptions on the value of liquid assets with ‘haircuts’ and behavioural factors that may have a significant impact on the estimated cash flows, such as a rapid withdrawal of funds.
Figure 4.18: Modifications to contractual cash flows in liquidity risk modelling
0%Prepayments
Pipeline
Drawdowns
Non-maturing product profiles
Replicating portfolios
Credit events
Withdrawal of funding
Contingent liabilities
70
51
74
72
19
42
74
72
84
14
Haircuts
Other
Source: PricewaterhouseCoopers
Oversight over modelling assumptions93% of participants have had their modelling assumptions reviewed and approved by ALCO or the equivalent body with primary oversight of liquidity risk. This is typically done on an annual basis (see Figure 4.19).
Figure 4.19: Frequency of ALCO review of liquidity risk modelling assumptions
7%
5%
0 - 10 bn0%
5%
19%
7%
51%
WeeklyMonthlyQuarterlySemi-annuallyAnnuallyAd-hocOther
Source: PricewaterhouseCoopers
All of the survey participants have done a comprehensive review of all of the modelling assumptions (see Figure 4.20). Nearly all have done so within the last 12 months, further highlighting the close attention being paid to liquidity risk.
Figure 4.20: Period of last review of liquidity risk modelling assumptions
0%Within last 12 months
Within last 1 – 2 years
Within last 2 – 3 years
Within last 2 – 5 years
Not at all in last 5 years
95
5
0
0
0
Source: PricewaterhouseCoopers
Contingency funding planOnly 65% of participants have conducted a simulation of their contingency funding plans. Where simulations have been completed, it was typically within the last 12 months (see Figure 4.21).
Figure 4.21: Period of last simulation of contingency funding plans
5%
51%
7%
2%2%
Within last 12 monthsWithin last 1 – 2 yearsWithin last 2 – 3 yearsWithin last 2 – 5 yearsNot at all in last 5 years
Source: PricewaterhouseCoopers
The bodies involved in the contingency funding plan are primarily the ALCO and Treasury. It is worth noting the low responses for the board and risk functions (see Figure 4.22).
18
Pricewaterhousecoopers Balance sheet managementbenchmark survey
Figure 4.22 : Parties involved in contingency funding plans
0%Board
Senior management
CFO
ALCO
Treasury
Risk Control
Communication department
IT department
Central banks
Other official sector parties
Other banks
Other
0
16
5
40
26
5
5
0
0
0
0
23
Source: PricewaterhouseCoopers
DisclosureFigure 4.23: Liquidity risk disclosures
0% Liquidity reserve
Liquidity gap
Funding diversification
Asset diversification
Regulator-requiredratios and measures
Other quantitative measures(please specify)
Organisational issues
Methodologies ofmeasures (qualitatively)
14
19
19
2
23
12
2
19
7
14
Limit framework (qualitatively)
Other qualitative issues
Source: PricewaterhouseCoopers
86% of participants are expecting changes in the liquidity risk regime set by their local supervisor, and over 90% believe their supervisor is adequately skilled to supervise liquidity risk.
The challenges for the supervisors are to have policies that are up to date with industry practices and to find the right balance, the form and the substance of the bank’s liquidity management practices (see Figure 4.24).
Figure 4.24: Challenges in supervising liquidity risk
0%Policies that are out of datecompared to industry practice
Focus on regulatory reportingas opposed to interpretationof ALM risk managementPoor relationship withhost supervisors
Ivory tower approach asopposed to pragmatism
33
42
12
16
Source: PricewaterhouseCoopers
19
Pricewaterhousecoopers Balance sheet managementbenchmark survey
Nearly all banks have been performing some form of interest rate risk management activities and have well-established processes. However, with the heightened focus on the overall Basel II application, both regulators and banks are reviewing and updating their approach to IRRBB.
While measures such as repricing gap and net interest income (NII) analysis are widely used, more attention is now paid to measures of economic value and capital for IRRBB. Of equal focus is the governance around the IRRBB framework, including the Board-approved risk appetite, ALCO investment and oversight, policies, limits, models and organisation structure.
GovernanceNearly all banks in the survey report having a formal risk appetite for IRRBB. The primary oversight body was identified by 70% of respondents as the ALCO (see Figure 5.1).
Figure 5.1 Oversight of interest rate risk
0%ALCO
Balance Sheet ManagementCommittee
Executive ManagementCommittee
Group Risk Committee
Board
Board Risk Committee
Board Audit Committee
Other
70
5
2
9
0
2
0
14
Source: PricewaterhouseCoopers
The main departments that support the ALCO framework are Treasury, Finance, ALM and Risk Management. This is an approach that reflects the general concept of segregation of duties in relation to the governance of interest rate risk management.
Figure 5.2: Management of IRRBB
0%Within trading desk/front office –reporting to head of BU
Dedicated treasury unit –reporting to CEO
Dedicated treasury unit –reporting to CFO
ALM unit – reportingas under 3.1 above
Other
19
9
16
47
9
Source: PricewaterhouseCoopers
Figure 5.3: Measurement of IRRBB
0%Within trading desk/front office –reporting to head of BU
Dedicated treasury unit –reporting to CEO
Dedicated treasury unit –reporting to CFO
ALM unit – reportingas under 3.1 above
Within CFO area
Within CRO area
Other
0
2
5
53
2
26
12
Source: PricewaterhouseCoopers
Figure 5.4: Monitoring of IRRBB
0%Within trading desk/front office –reporting to head of BU
Dedicated treasury unit –reporting to CEO
Dedicated treasury unit –reporting to CFO
ALM unit – reportingas under 3.1 above
Within CFO area
Within CRO area
Other
0
0
2
35
0
44
19
Source: PricewaterhouseCoopers
Interest rate riskInterest rate risk in the banking book (IRRBB), as it is referred to in the various documents produced by the Basel Committee, is the area that has probably had the most attention within banks’ ALM functions over the years.
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Pricewaterhousecoopers Balance sheet managementbenchmark survey
The results show that a large percentage of respondents that have a structure that combines many of these activities within an ALM unit. There is, however, some attention as to how the traditional ALM unit may evolve, mainly in relation to separating the management of IRRBB positions from the unit that is measuring and/or monitoring the positions (see Figure 5.2-5.4). Some banks have adopted a model akin to the market risk function to handle the measurement and monitoring, while the management aspect is conducted within the Treasury or Finance division.
Nearly 80% have complete, up to date and fully implemented policies for IRRBB (see Figure 5.5).
Figure 5.5: Policy
0%Policy is complete, up to date and fully implemented
Policy is broadly complete and up to date, but there areminor gaps in either the policy itself or its implementation
Policy is work in progress
We do not have a group interest rate risk policy
79
19
2
0
Source: PricewaterhouseCoopers
79% of respondents say their Board’s have a broad level of knowledge of the concepts and technical details for interest rate risk management and 12% say that they have an even higher level (see Figure 5.6).
Figure 5.6: Board understanding of IRRBB
0%Very high understanding with full grasp of the technical details
Broad understanding of the concepts with some understanding of the technical details
Broad understanding of the concepts but little or no understanding of the technical details
Limited understanding of the concepts
12
79
2
7
Source: PricewaterhouseCoopers
Most participants provide regular reports to the full Board (47%) or the Board’s Risk Committee (60%) (see Figure 5.7). This is one of the principles in the Basel ‘Sound Practices for the Management and Supervision of Interest Rate Risk’.
Figure 5.7: Board reporting
0%At every full Board meeting
At every Board RiskCommittee meeting
On request/ad hoc to the full Board
On request/ad hoc to theBoard Risk Committee
47
60
33
21
Source: PricewaterhouseCoopers
Investment term of equityOne of the key performance metrics for managing IRRBB is the use of a benchmark for the investment term, or duration, of equity. 58% of participants use this benchmark within their interest rate risk frameworks. The most common period targeted is the medium term of between one and five years for 42% of respondents (see Figure 5.8). This benchmark is generally reviewed and/or changed on an ad hoc basis over the course of the year, indicating that many respondents will change this target in accordance with their strategy and outlook for the interest rate market (see Figure 5.9).
Figure 5.8: Target duration of equity
0%Short term (i.e. less than 1 year)
Medium term (i.e. between1 and 5 years)
Long term (i.e. more than 5 years)
9
42
5
Source: PricewaterhouseCoopers
Figure 5.9: Frequency of review of equity duration benchmark
0%Quarterly
Annually
Greater than annually/ad hoc
9
21
28
Source: PricewaterhouseCoopers
21
Pricewaterhousecoopers Balance sheet managementbenchmark survey
MeasurementAll participants use a variety of measures, generally in combination, to assess IRRBB (see Figure 5.10 and 5.11). These range from repricing gaps to earnings and economic value simulations. The challenge for the measurement and management of IRRBB has been to strike the appropriate balance between the short-term (i.e. less than one year) impact on earnings and the longer term impact on economic value. Respondents have indicated that they have been able to establish a reasonable balance between short-term and long-term measures. It is also worth noting that around 70% of the banks isolate the mismatch earnings to separate P&L units and forecast these specific amounts. This is an area where there are divergent opinions over the appropriate performance measures for the unit managing IRRBB when comparing accrual-type earnings with economic value risk measures.
Figure 5.10: Primary measurement tool for IRRBB
0%Dynamic repricing gap based on contractual repricing
Dynamic repricing gap based on a mixture of contractual and modelled repricing
Dynamic repricing gap based on modelled repricing
Static repricing gap based on contractual repricing
Static repricing gap based on a mixtureof contractual and modelled repricing
Static repricing gap based on modelled repricing
Dynamic balance simulation of earnings
Static balance simulation of earnings
Dynamic balance simulation of economic value
Static balance simulation of economic value
Other
16
28
7
14
40
9
42
26
19
37
21
Source: PricewaterhouseCoopers
Figure 5.11: Secondary measurement tool for IRRBB
0%Dynamic repricing gap based on contractual repricing
Dynamic repricing gap based on a mixture of contractual and modelled repricing
Dynamic repricing gap based on modelled repricing
Static repricing gap based on contractual repricing
Static repricing gap based on a mixture of contractual and modelled repricing
Static repricing gap based on modelled repricing
Dynamic balance simulation of earnings
Static balance simulation of earnings
Dynamic balance simulation of economic value
Static balance simulation of economic value
Other
12
9
9
16
14
7
14
9
12
14
12
Source: PricewaterhouseCoopers
This can also be seen in the split between the limits applied to the respective measures. The two key identified limits are on the static economic value simulation and the dynamic earning simulation (see Figure 5.12). The slightly higher figure for a limit on the static economic value measure may be related to the fact that this is the measure that was promulgated within the Basel papers as being the approach that regulators are advised to use to determine the level of capital for IRRBB.
Over 80% of respondents measure the capital required to support IRRBB and the link to the Basel approach is supported by the use of an economic value approach.
22
Pricewaterhousecoopers Balance sheet managementbenchmark survey
Figure 5.12: Limits for IRRBB
0%Dynamic repricing gap based on contractual repricing
Dynamic repricing gap based on a mixture of contractual and modelled repricing
Dynamic repricing gap based on modelled repricing
Static repricing gap based on contractual repricing
Static repricing gap based on a mixture of contractual and modelled repricing
Static repricing gap based on modelled repricing
Dynamic balance simulation of earnings
Static balance simulation of earnings
Dynamic balance simulation of economic value
Static balance simulation of economic value
Other
12
16
5
9
21
5
35
21
14
40
16
Source: PricewaterhouseCoopers
Figure 5.13: Capital for IRRBB
0%Using the standard 200 bps on economic value of capital shock
Using NII simulation
Static1 year periodAnother period
28
0
0
0
14
51
0
26
0
7
0
0
19
0
0
Using economic value simulation
Other (please specify)
We do not measure capital for interest rate risk in the banking book
Source: PricewaterhouseCoopers
Nearly all banks generate their IRRBB measures on at least a monthly basis (see Figure 5.14). Most of the banks that perform this on a daily basis are based in Europe.
Figure 5.14: Frequency of IRRBB measurement
0% Dynamic repricing gap basedon contractual repricing
Dynamic repricing gap based on amixture of contractual and modelledrepricingDynamic repricing gap basedon modelled repricing
Static repricing gap basedon contractual repricing
Static repricing gap based on amixture of contractual and modelledrepricingStatic repricing gap basedon modelled repricing
Dynamic balance simulationof earnings
Static balance simulationof earnings
Dynamic balance simulationof economic value
Static balance simulationof economic value
Other (please specify)
DailyWeeklyMonthlyOther
5 5 21
2 192
2
16 2 14
12 2
7 16
7 742
305
215
2 477
5 1212 2
5
23
12 2 37
Source: PricewaterhouseCoopers
Just over 80% of respondents have had their IRRBB framework reviewed by their regulatory supervisors, and the results have been generally satisfactory (see Figure 5.15).
Figure 5.15: Supervisory review of IRRBB
0%Yes, and authority was fully satisfied
Yes, but authority requires further minor enhancements
Yes, but authority was dissatisfied
No, but authority has notified us that they intend to review this in the next 12 months
Authority has not notified us that they planto review IRRBB in the next 12 months
Other
65
16
0
7
2
7
Source: PricewaterhouseCoopers
23
Pricewaterhousecoopers Balance sheet managementbenchmark survey
One of the biggest challenges for banks is to establish an effective, integrated operating model to bring all of the components together and thus enable consistency and clarity within the application of the whole and related sub-components, particularly when related to the ICAAP. It has drawn greater attention within the ALM or Balance Sheet Management function under the governance of ALCOs in many cases.
StructureAs we can see from figure 6.2, most of the key capital management activities are split between the CFO and CRO functions. Traditionally, the CFO has had responsibility for regulatory risk reporting and capital planning with a general ‘top down’ approach. The calculation of economic capital has tended to evolve under the CRO on a ‘bottom’ up basis. Some of the challenges that arise with this approach are, for example:
Consistency with economic capital and capital allocation.•
Using a ‘top down’ holistic economic capital model that can •integrate the ‘bottom up’ measured risks and perform robust intra-risk diversification measurement.
Using this model for stress testing and then linking to •capital planning.
Reconciling regulatory risk-weighted assets (RWAs) to •economic capital.
Effectively harnessing the capital adequacy measure for •stress testing and capital planning to properly capture both risk measures and accounting components, particularly with credit risk and loan loss provisioning.
Consistency of balances used for capital allocation and funds •transfer pricing (FTP) that drive key components that feed into economic value and risk-adjusted return on capital (RAROC) measures.
Figure 6.1: Which senior executive has responsibility for the following activities within his/her area
Capital stress testing
Capital planning
Return on (risk-adjusted) capital calculations
Capital allocation within the organisation
Economic capital calculation
Capital adequacy reporting
Regulatory
RWA calculation
0%
CEOCFOCROCOO/head of operationsTreasurerOther
Setting cost of capital
2
2 5
75
5
7
122
2 9
2
2
5
53
67
70
70
35
72
70 16
67 28
21
56
19
21
12
49
672 216
9
5
9
9
12
9
21
9
9
Source: PricewaterhouseCoopers
90% of respondents have a dedicated capital management unit, with the majority reporting to the CFO.
Figure 6.2: Capital management unit reporting line
0%CEO
CFO
CRO
COO
Treasury
Other
2
60
12
0
19
2
Source: PricewaterhouseCoopers
The average headcount of these units is approximately 15, with a maximum of 60 people.
Capital managementFor this survey, we have included a section on capital management for the first time. This is in response to the increased attention being paid to capital management in a Basel II world and in response to many questions from our clients regarding some of the issues covered.
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Pricewaterhousecoopers Balance sheet managementbenchmark survey
Figure 6.3: Capital management unit headcount
55%
3%
13%
29%
<=1011 – 3031 – 50>50
Source: PricewaterhouseCoopers
As mentioned in the introduction, the ALCO has been the main executive body that has oversight of capital management with 49% of respondents (see Figure 6.4).
Figure 6.4: Oversight of capital management
0%ALCO
Balance Sheet ManagementCommittee
Finance Committee
Group Risk Committee
Executive Management Committee
49
12
2
12
26
Source: PricewaterhouseCoopers
ActivitiesThe main activities performed by the capital management unit are capital planning, capital stress testing, capital allocation and setting the cost of capital (see Figure 6.5).
Other related activities are more fragmented and it would appear that for most respondents, the capital management unit is a receiver of economic capital information and that it is unlikely to be involved in the calculation of regulatory capital adequacy and risk-weighted assets.
Figure 6.5: Activities of the capital management unit
0%Calculation of regulatorycapital RWAs
Regulatory capitaladequacy reporting
Economic capital calculation
Capital allocation
Return on (risk-adjusted)capital calculation
Capital planning
Capital stress testing
Setting cost of capital
30
40
44
67
51
88
72
65
Source: PricewaterhouseCoopers
With regards to capital planning, the time horizon used by nearly half of the respondents is three years (see Figure 6.6).
Figure 6.6: Time horizon for capital planning
0%One year
Two years
Three years
More than three years
Ad hoc
None – we do notdo capital planning
14
12
49
19
5
0
Source: PricewaterhouseCoopers
This time horizon is broadly consistent with the period looked at for capital stress testing, although there appears to be a shift in focus to shorter time frames for stress testing compared to capital planning (see Figure 6.7).
Figure 6.7: Time horizon for capital stress testing
0%One year
Two years
Three years
More than three years
Ad hoc
None – we do not do capital stress testing
21
16
37
9
7
2
Source: PricewaterhouseCoopers
25
Pricewaterhousecoopers Balance sheet managementbenchmark survey
Most respondents (63%) have reported that they conduct at least three or more scenarios for their capital stress testing (see Figure 6.8).
Figure 6.8: Number of scenarios for capital stress testing
0%None
1
2
3
4 – 5
5 – 10
>10
5
12
14
26
14
23
0
Source: PricewaterhouseCoopers
GovernanceAll respondents have a capital management policy in place, with nearly half asserting that it is complete, up to date and fully implemented (see Figure 6.9).
Figure 6.9: Capital management policy
0%Policy is complete, up to date and fully implemented
Policy is broadly complete and up to date, but there areminor gaps in either the policy itself or its implementation
Policy is work in progress
We do not have a group capital management policy
47
44
5
0
Source: PricewaterhouseCoopers
Most Boards have a reasonable understanding of capital management and the associated technical concepts, with 26% reporting to have a very high level of understanding (see Figure 6.10).
Figure 6.10: Board awareness of capital management
0%Very high understanding with full grasp ofthe technical details
Broad understanding of the concepts with some understanding of the technical details
Broad understanding of the concepts but little or no understanding of the technical details
Limited understanding of the concepts
26
63
7
0
Source: PricewaterhouseCoopers
It would be expected that there is regular reporting of capital adequacy to the Board, its Risk Committee, or both. What is surprising is that over a quarter of respondents (i.e. ‘other’ category) do not regularly report this information to the Board, but instead generally provide capital adequacy updates to some form of executive committee (see Figure 6.11).
Figure 6.11: Board reporting of capital adequacy
0%At every full Board meeting
At every Board RiskCommittee meeting
On request/ad hoc to the full Board
On request/ad hoc to theBoard Risk Committee
Other
72
42
28
16
26
Source: PricewaterhouseCoopers
26
Pricewaterhousecoopers Balance sheet managementbenchmark survey
However, over the past year many banks have been revisiting their practices and paying significant attention to ensuring that it is functioning properly and is supported by robust, appropriate methodologies.
The importance of FTP has been highlighted as it underpins the interest margin and profitability results and, thus, has a significant impact on business unit performance measurement and business behaviour. It has been recognised that aspects like pricing for liquidity, optionality, customer behaviour and trading portfolios require more attention to ensure that underlying risks are properly reflected within pricing and performance measurement practices.
It is important that FTP is well understood throughout the bank and that the implications of it are understood beyond the specialised functions administering it. Methods must be sound and transparent and an appropriate level of governance undertaken to avoid potential conflict of interest.
GovernanceAround half of the participating banks have their FTP policy as a part of the ALCO responsibilities (see Figure 7.1). In some banks it resides with the Finance or Treasury function (as noted within the ‘other’ category).
Figure 7.1: Responsibility for FTP policy
0%ALCO
Executive Management Committee
Board
Board Risk Committee
CEO
CFO
CRO
Other
47
14
2
2
2
12
2
19
Source: PricewaterhouseCoopers
The responsibility for managing the FTP process is primarily with the ALM unit (44%), or with the Finance or Treasury units (see Figure 7.2). A key governance point regarding the management of FTP and the setting of policy is to consider the aspect of segregation of duties. This aspect of managing FTP is of higher importance for units that are considered profit centres.
Figure 7.2: Management of FTP process
0%Finance
Risk
ALM
Treasury
Other
37
5
44
40
16
Source: PricewaterhouseCoopers
While 90% of respondents have an FTP policy in place, it is notable that around half feel that they have some gaps in the policy or its implementation (see Figure 7.3).
Figure 7.3: Status of FTP policy
0%Policy is complete, up to date and fully implemented
Policy is broadly complete and up to date, but there areminor gaps in either the policy itself or its implementation
Policy is work in progress
We do not have a FTP policy
44
47
5
5
Source: PricewaterhouseCoopers
Funds transfer pricingFunds transfer pricing has been a key component of most banks’ ALM frameworks for many years. It has often been sitting in the background and seen as a process function and not necessarily well understood or appreciated beyond the units administering it.
27
Pricewaterhousecoopers Balance sheet managementbenchmark survey
The clear majority of approaches use FTP rates that are matched according to term or cash flow (see Figure 7.4).
Figure 7.4: FTP approach
0%Single FTP rate across all assets and liabilities
Allocation of assets and liabilities to homogeneouspools, with one rate for each pool
Matched rate FTP for individual assets and liabilities
Matched rate for each cash flow
Not applicable – we do not have an FTP process
Other
12
9
56
12
0
16
Source: PricewaterhouseCoopers
Nearly all respondents (95%) use interbank money market/ swap rates to determine their FTP rates (see Figure 7.5). It is also very common to have an adjustment for funding liquidity, or a liquidity buffer (81%), and the use of an adjustment for asset liquidity is growing (44%). A third of respondents also use ‘political’ of non-risk related adjustments to influence FTP results.
Figure 7.5: Components of FTP rates
0%Bank deposit rates
Bank loan rates
Government bond yield
Interbank money market/swap rates
Funding liquidity/liquidity buffer cost
Asset liquidity
Option price
Tax effect
33
21
28
95
81
44
33
2
12
33
Capital usage
‘Political’ adjustment
Source: PricewaterhouseCoopers
When making adjustments for liquidity, two-thirds of respondents differentiate them by term and/or by product.
Figure 7.6: Treatment of liquidity risk in FTP rates
0%Single liquidity risk premiumacross all assets
Single liquidity risk premium acrossall assets and single discountacross all liabilitiesDifferentiated liquidity risk premiaand discounts
Not applicable – we do not factorin any liquidity risk adjustments
Other
5
14
67
9
5
Source: PricewaterhouseCoopers
Over half update their FTP rates on a daily basis, with a further 16% updating rates on an intra-day basis (see Figure 7.7).
Figure 7.7: Frequency of FTP rate updates
0%Intra-day
Daily
Weekly
Monthly
Longer term than monthly
16
51
5
26
2
Source: PricewaterhouseCoopers
While most participants are generally satisfied with their FTP frameworks, the areas that seem to require additional attention are improvements to the understanding, acceptance, and reporting of FTP (see Figure 7.8).
Figure 7.8: Satisfaction with FTP framework
0%Methods
Reporting
Accuracy
Understanding and acceptance
21 51 26
9 51 37
12 49 37
9 42 42 5
CompletelyVeryPartiallySlightlyNot at all
Source: PricewaterhouseCoopers
28
Pricewaterhousecoopers Balance sheet managementbenchmark survey
Discretionary investment portfolios consist of investments that are outside the ‘normal’ business activities of banks, such as:
Trading portfolios;•
Temporary warehousing of securitisation pipelines; or•
Debt/equity investments resulting from problem loan work-outs. •
As these portfolios in many cases include liquidity portfolios, it is not surprising that a high proportion (65%) of banks report managing such portfolios.
Statutory liquidity portfolios are typically managed by the CFO or Treasurer, with surplus liquidity typically passed to the trading desk to manage. However, quite a significant portion of strategic and other investment portfolios are managed by a dedicated corporate strategy/investments/development type of function.
Figure 8.1: Discretionary portfolio types
0%CEO
CFO
Trading
Treasurer
ALM unit
Other
10
14
5
43 36 24
10 14 10
14 10 12 60
Statutory liquidity portfolioSurplus liquidity portfolioStrategic investmentOther
Source: PricewaterhouseCoopers
Other than the standard liquidity portfolios, we find that there is little commonality as to how the discretionary portfolios are managed and monitored.
Figure 8.2: Investment portfolio monitoring
0%CEO
CFO
Trading
Treasurer
ALM unit
Other
0
7 0
00
0
0 0
Statutory liquidity portfolioSurplus liquidity portfolioStrategic investmentOther
0 2 0
35 33 30 60
9 12 12
1214 7
0 2 2
9 9 14
Source: PricewaterhouseCoopers
However, we do find that, in around two thirds of banks, there is oversight over these portfolios at a suitably senior committee level.
Figure 8.3: Investment portfolio oversight
0%ALCO
Balance Sheet ManagementCommittee
Executive ManagementCommittee
Group Risk Committee
Board
Board Risk Committee
Board Audit Committee
Other
40
0
7
9
0
2
0
7
Source: PricewaterhouseCoopers
It is also notable that only a minority of banks have clear policies for managing these portfolios.
Figure 8.4: Investment portfolio policy
0%Policy is complete, up to date and fully implemented
Policy is broadly complete and up to date, but there areminor gaps in either the policy itself or its implementation
Policy is work in progress
We do not have a group discretionary investment policy
33
19
7
7
Source: PricewaterhouseCoopers
This, coupled with the lack of clear monitoring, would indicate that discretionary investments are very much entered into on an ‘ad hoc’ basis, leaving room for potential problems arising from these portfolios.
Discretionary investment portfolios
29
Pricewaterhousecoopers Balance sheet managementbenchmark survey
Some have even moved into extending modules into other risk categories, such as credit risk, to provide the foundation for the possibility of a fully integrated risk capital model that leverages the ALM platform.
At this stage, most banks seem to have a combination of various vendor systems and in-house built models supporting different parts of their ALM framework (see Figure 9.1). A handful of banks have started to make progress on achieving the use of a single, fully integrated platform.
Figure 9.1: Software used for ALM model
Third partyIn-houseThird party for IRRBB, FTP and liquidityIn-house for IRRBB, FTP and liquidityAll third partyAll in-houseMix of the twoOther
0%Single, fully integrated model forliquidity, IRRBB, FTP andcapital managementSame for IRRBB, FTP and liquidity,but not capital management
Separate models for each item
Other
2 2
19 16
12 16 53
5
Source: PricewaterhouseCoopers
QRM and Sungard Bancware are the main ALM systems currently used, followed by IPS Sendero/KRM and Algorithmics. However, half of the respondents also use some form of in-house built solutions in combination with vendor models (see Figure 9.2).
Figure 9.2: Systems used for ALM model
0%In-house ALM system
Sungard Bancware
QRM
Algorithmics
IPS-Sendero
Kamakura Risk Manager (KRM)
OFSA
Risk Pro
Fermat
Misys Almonde
Other
51
30
28
14
14
9
7
7
5
0
30
Source: PricewaterhouseCoopers
However, a significant number of banks are planning changes to their systems over the coming two years (see Figure 9.3). The key area of capability is around increasing granularity and developing transaction-based models.
Figure 9.3: Systems changes planned
0%Implementing new ALM system
Implementing new liquidity system
Implementing new FTP system
Implementing newbehavioural models
Major extension to ALM reportingin terms of granularity
Major extension to liquidityreporting in terms of granularity
26
28
19
26
35
42
Source: PricewaterhouseCoopers
SystemsThere has been tremendous development of balance sheet management systems capabilities over recent years. Many ALM software vendors have developed integrated architecture and modules to enable IRRBB, liquidity and FTP to be managed from the same platform.
30
Pricewaterhousecoopers Balance sheet managementbenchmark survey
The consultants who assisted with this survey were:
North AmericaUSA Shyam Venkat Partner [email protected] +1 646 471 8296
Europe:Denmark Henrik Axelsen Partner [email protected] +45 39 45 99 80
France Rami Feghali Partner [email protected] +33 1 56 57 71 27
Germany Peter Goldschmidt Senior Manager [email protected] +49 69 9585 2682
Ireland Ronan Doyle Partner [email protected] +353 1 792 6559
Italy Alessandro di Lorenzo Director [email protected] +39 02 66720571
Netherlands Hristina Lokvenec-Guleska Senior Adviser [email protected] +31 (0)20 5684133
Spain Ignacio Medina Director [email protected] +34 915 684 183
Sweden Fredrik Lindell Senior Manager [email protected] +46 70 92 93 678
Switzerland Arno Stöckli Director [email protected] +41 58 792 27 53
United Kingdom Richard Barfield Director [email protected] +44 (0) 20 7804 6658
Middle East and AfricaSouth Africa Ina de Vry Partner [email protected] +27 11 797 4036
Asia/PacificMalaysia/Thailand Cameron Evans Director [email protected] +66 2344 1185
Singapore Chris Matten Partner [email protected] +65 6236 3878
Australia Richard Groves Director [email protected] +61 2 8266 1499
Contacts
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